credit_cards.jpgIn the game of finances, there are no hard and fast rules. Some experts advise never to carry long-term credit card debt, but then you hear others saying credit cards are a good way to float money or in cases of emergencies. So, what’s the real story? Do credit cards hurt or help? Like any financial tool, they can be helpful in some situations and harmful in others. The trick is to understand not only what situation you are in, but also how your financial habits contribute to your accumulation of wealth or debt. If you can’t be trusted to follow good monetary common sense with a source of easy revolving credit, like credit cards, then it might pay for you to use some short-term products like payday loans to keep you honest by forcing you to pay back the loan in the short-term. However, that doesn’t mean that credit cards are hurtful, it means you may not be able to manage credit card debt as well as other forms of debt.

Here are some guidelines you should consider when deciding whether any financial tool is right for you:

  • Is it right for your situation?
  • Does it fit your financial personality?
  • Is it a short-term or long-term solution you are seeking?
  • How does this contribute to your financial net worth and long range goals?

It is right for your situation?

Can you qualify for a credit card or a conventional loan? This all depends on your particular situation. If your credit is shot, you may only be able to get a paycheck loan to tide you over or you may end up with a credit card with a 30% interest rate. In that situation, the payday loan may actually be a better tool because it forces you to pay back the loan on your next paycheck cycle.

If you have great credit and some financial discipline, credit cards offer convenience and fraud protection. They also come with perks. If you don’t carry a large balance and can pay it back monthly, then this may be a great way to get even more bang for you buck.

Does it fit your financial personality?

Most of us fall into a middle category where we have some financial responsibility but fall prey to temptation every now and then. If you know what your weaknesses are you can avoid using a credit card for those types of impulsive purchases. Having a credit card will appeal to people in this middle category. It provides convenience and the ability to manage our finances more long-term. It also can end up being a source of long-term debt, if we are not careful. However, most people eventually learn how to manage credit card debt to make it more useful than it is harmful, in this particular personality profile.

There are people who should not get a credit card. These are people who make impulsive purchases and who don’t understand financial matters enough to realize that that variable rate can keep them paying off a debt over many years, instead of paying off the balance quickly in the short-term. People who are tempted to use a credit card for gas or grocery purchases should also avoid this type of financial tool. You don’t want to end up paying back the lunch you had yesterday continuously up to three years from now. People in this category don’t budget, have no clue how much income they make nor how much they spend. First, get a handle on your regular finances and put a stop to inconsequential purchases, then consider having a credit card. Otherwise, this type of financial tool can lead to financial ruin.

Is it a short-term or long-term solution you are seeking?

So, once you understand the risks and are willing to manage them, you also need to ascertain what types of debt the credit card works best for in your particular case. Are you seeking a short-term solution and using the credit card to float you during the month when additional unexpected expenses come in? This can be a great way to use a low interest rate credit card. Unlike other financial tools, the credit card can have a lower interest rate if it is properly handled. However, if you are consistently turning to a credit card, month after month, to help meet short-term gaps then this can signal that you are having a problem with income, not emergency situations. Seek to increase your income and reduce your debt as quickly as possible in these cases. Avoid long-term, revolving debt that happens when you’ve mismanaged your credit card account, and it’s gone from being from a short-term solution to a long-term risk. Choose other products for long-term debts that you need to take care of, like a conventional loan with a fixed rate and short term.

How does this contribute to your financial net worth and long range goals?

Now, we come to the part of debt management which is all about image. There is the image that the credit bureau preserves of your financial trustworthiness and there is the image that you have about your own net worth and long range goals. People who are completely risk averse in our society may decide to completely avoid credit cards, however, they are a wonderful way to establish your credit worthiness with the credit bureaus (as long as you pay them back on time). In a society that deals with credit worthiness in terms of the FICO score, having a couple of credit cards that are used periodically can significantly increase your trust worthiness and help you in other areas of your finances: your mortgage, you employment, and your insurance premiums. Having a good record of credit worthiness can make you a desirable person to lend to and provide you with rates that are lower than other people’s rates for the same products and services in society. This can help you build wealth in the long run.

If, however, you decide to carry a large balance and make payments late or default, this also affects your image of trustworthiness and you end up with the opposite effect: you pay more for practically everything. This also affects your long range goals, from buying a house to getting a car loan. Unless you have stashes of money put aside for major purchases, you will eventually have to take out a loan to make a major purchase and that’s when you want to be perceived as a good risk. Having a couple of credit cards that are paid back quickly and on time, with large potential balances available, is a great way to make you look like a disciplined and knowledgeable financial manager.

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